bank run blog

In a quarterly report described by Chairman Sheila Bair as “pretty dismal”, the Federal Deposit Insurance Corporation revealed that earnings for US banks dropped 86 percent year over year. The FDIC raised the number of banks on its watch list to 117. The Associated Press reports :

“The number of troubled U.S. banks leaped to the highest level in about five years and bank profits plunged by 86 percent in the second quarter, as slumps in the housing and credit markets continued.

Federal Deposit Insurance Corp. data released Tuesday show 117 banks and thrifts were considered to be in trouble in the second quarter, up from 90 in the prior quarter and the biggest tally since mid-2003.

The FDIC also said that federally-insured banks and savings institutions earned $5 billion in the April-June period, down from $36.8 billion a year earlier. The roughly 8,500 banks and thrifts also set aside a record $50.2 billion to cover losses from soured mortgages and other loans in the second quarter.”

According to CNN, bad loans and failed investments have forced banks to set aside more and more capital to cover losses :

“Facing additional deterioration in the housing market and further weakness in the broader economy, FDIC-insured banks set aside $50.2 billion during the quarter, more than four times the quarterly total of $11.4 billion from a year ago.

At the same time, nonperforming assets and net charge-offs, or loans banks don’t think are collectable, continued to rise, totaling $26.4 billion in the second quarter, almost three times the $8.9 billion during the second quarter of 2007.”

Associated Press : FDIC: troubled banks highest in 5 years; bank profits dropped by 86 percent in second quarter

CNN Money : Problem bank list keeps growing

A report by an insurance industry analyst at Credit Suisse raised new fears of insolvency at the conglomerate AIG, which was already the subject of rumors that it had downplayed some of its exposures. In one day, estimates for third quarter losses increased an unheard of $4 billion, according to CNN :

“American International Group Inc. (AIG) may be sitting on losses that are billions of dollars greater than Wall Street expects, according to an analyst’s report Monday.

Credit Suisse analyst Thomas Gallagher estimated losses from the insurance giant’s financial-products division will reach $6.5 billion during the third quarter, compared with his prior estimate of $2.6 billion.”

The company hedged its insurance bets in the now moribund MBS market, and now, like many US banks, AIG has to tune in each day to discover the extent of its losses :

“The health of AIG’s financial products unit is directly tied to the credit market indicies that are used to value the mortage-backed securities on its balance sheet. Those indicies have turned sharply lower in the last three months, some declining as much as a quarter in value.

As a result, Gallagher now expects AIG to post a loss of 86 cents a share when it reports third-quarter results in November. The average analyst estimate is for a profit of 75 cents a share.”

MarketWatch is reporting that the rumors are about to lead to ratings downgrades for AIG, which will only make the company’s position less tenable :

“On Friday, Fitch Ratings said it may downgrade ratings of AIG and its subsidiaries because of uncertainties about a business review the company plans to complete in September.

A possible downgrade ‘also reflects ongoing uncertainty associated with [AIG’s] potential for additional realized and unrealized losses on its various residential mortgage-backed securities-related exposures, including its portfolio of credit default swaps and resultant collateral posting and capital needs,’ Fitch said.

Credit Suisse analysts said action by the ratings agencies would dramatically hurt AIG. ‘In the event of a one-notch ratings downgrade from both Moody’s and S&P, AIG would be required to post up to $13.3 billion of additional collateral,’ they said.”

CNN Money : Analyst: AIG May See $6.5 Billion In 3Q Losses From Credit Market Pain

MarketWatch : AIG down as Credit Suisse predicts quarterly loss

For at least four years, perceptive analysts have been predicting that the economic meltdown that began with massive securities fraud on Wall Street would eventually precipitate a steady decline in US prestige internationally, along with a dramatic reduction in American living standards. Among the more extreme scenarios, early on, was the nation losing its triple A credit rating.

Now that has become a possibility that mainstream media outlets are willing to consider. Three recent news stories contemplate different circumstances that could lead to the US being downgraded. USA Today reports that the country’s aging population threatens its credit rating :

“The United States may lose its “AAA” top credit rating unless the government adopts ‘concerted’ policy and fiscal reforms to mitigate the ‘intense’ pressures on the budget from an aging population, ratings agency Standard & Poor’s said Tuesday.

Unless the government takes measures to cut its fiscal deficit, the country’s credit rating would fall to single-A after 2015 and as low as the ‘BBB’ category by 2020, S&P said in a press release.”

The Treasury assures us that the staggering record budget deficit recently announced by the Bush administration will not lead to an immediate downgrade, according to the Washington Times :

“Two days after the White House revealed that the budget deficit for fiscal 2009 will set a record approaching $500 billion, the Treasury Department announced its strategy to finance all that extra borrowing.

Anthony Ryan, Treasury’s acting undersecretary for domestic finance, announced Wednesday that the federal government will borrow $171 billion during the July-September quarter. That’s the second-largest quarterly financing requirement in history - and fiscal 2009 doesn’t even begin until Oct. 1.

Mr. Ryan expressed confidence that the federal government would continue to maintain its AAA credit rating even as budget deficits rise.”

MarketWatch reports that even after the inevitable bailout of Fannie Mae and Freddie Mac, the US will still be a triple A debt customer :

“Although extending aid to Fannie Mae and Freddie Mac could test the resiliency of the U.S. government balance sheet, it would not endanger the U.S. government’s strong Aaa rating, Moody’s Investors Service said Thursday.”

USA Today : Aging population threatens USA’s “AAA” credit rating

Washington Times : Treasury confident it will keep AAA rating

MarketWatch : Moody’s: Fannie, Freddie woes no threat to U.S. ‘Aaa’ rating

A former chief economist for the IMF has predicted the failure of a large US financial institution within months, the latest in a series of indications that the crisis in the financial markets has not bottomed. The Times reports :

“The deepening toll from the global financial crisis could trigger the failure of a large US bank within months, a respected former chief economist of the International Monetary Fund claimed today, fuelling another battering for banking shares.

Professor Kenneth Rogoff, a leading academic economist, said there was yet worse news to come from the worldwide credit crunch and financial turmoil, particularly in the United States, and that a high-profile casualty among American banks was highly likely.

‘The US is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come,’ Prof Rogoff said at a conference in Singapore.

In an ominous warning, he added: ‘We’re not just going to see mid-sized banks go under in the next few months, we’re going to see a whopper, we’re going to see a big one — one of the big investment banks or big banks,’ he said.”

Times : Credit crunch may take out large US bank warns former IMF chief

BBC News : US bank ‘to fail within months’

As the third anniversary of Hurricane Katrina approaches, analysts are generally pessimistic about the long-term prospects for economic recovery in New Orleans. Today CNN Money is reporting New Orleans still searching for economic elixir :

“Almost three years after Hurricane Katrina, interest increasingly is focusing on New Orleans’ economy, and whether rebuilding now under way has breathed new life into what had been a back-in-the pack business climate.

Buoyed by billions of federal aid dollars, construction companies are doing well. Tourism is rebounding. But overall, there’s not a lot of glow in the city’s economic situation.”

Most of the “growth” is just contractors milking government funds, a diminishing source of financial activity for which local economists don’t see a replacement. According to the New Orleans Times-Picayune :

“As hurricane rebuilding continues, the New Orleans economy is “plodding along” but not showing signs of growth with new businesses coming into the area, economist and consultant Loren Scott said Monday.”

CNN Money : New Orleans still searching for economic elixir

New Orleans Times-Picayune : Local economy ‘plodding along’

Reuters : FACTBOX: New Orleans before, after Hurricane Katrina

One aspect of the credit crisis in the US financial markets that has received little attention is the effect on mergers, acquisitions, leveraged buyouts and private equity deals. The past decade saw huge activity in these areas, generating massive notional profits, which in turn generated considerable fees for financial institutions involved in the deals. This reliable well has suddenly gone dry, leaving Wall Street fund managers scrambling. Today Bloomberg is reporting KKR, Apollo Seek Debt as Private-Equity Deals Wane :

“Wall Street investment banks have cut back on lending as turmoil in the credit markets forced them to take more than $500 billion in writedowns, losses and credit provisions since the beginning of last year. Announced private-equity deals worldwide so far this year have fallen 71 percent from the same period last year to $179.4 billion, according to data compiled by Bloomberg.

‘The mega-funds who are going public are looking for alternative revenue streams with more predictable cash flows,’ said John O’Neill, a partner with Ernst & Young LLP in New York. ‘They’re having difficulty getting financing for deals and they’re always looking for opportunities for returns.’”

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CNN Money has an interesting look at the same situation in an article headlined Apollo’s numbers reveal private equity’s fall :

“It made all the sense in the world last year when Apollo Global Management LLC started making sounds about going public. At the time, private equity firms were riding high and everyone seemed to want a piece.

But a look at the firm’s latest numbers shows why the private-equity gameplan of using cheap debt to take companies private, cut costs and re-sell them is running into complications in a credit crunch that has investors shying away from risk.

The numbers, contained in an SEC filing in advance of the planned public stock offering, also explain why institutional investors that have been putting their money into Apollo now are eager to pull some out.”

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In a predictable but unfortunate response to the collapse of the securitized debt market that they themselves created, banks are now “tightening their lending standards,” or, more accurately, suspending all lending activity while they chase short profits and try to replenish their reserves. This is bound to have an immense impact on the US economy, which has been built on easy access to consumer credit. The Associated Press is reporting tonight that the Federal Reserve finds deepening credit crisis :

“More banks are tightening lending standards on home mortgages and other consumer and business loans as a deepening credit crisis exerts a heavier toll on the economy.

The Federal Reserve said Monday the percentage of banks reporting tighter lending standards rose across various loan types in its July survey. In April, the central bank had found that the percentage of banks reporting tighter lending standards was already near historic highs.”

The AP article notes that all areas of consumer credit have been affected :

“For home equity lines of credit, 80 percent of the banks surveyed said they had tightened their lending standards in this area.

For credit cards, the percentage of domestic banks reporting tighter lending standards was about 65 percent, more than double the 30 percent who reported they were tightening lending standards for credit cards three months ago.

Analysts said that the big jump in higher standards for credit card debt could represent a serious threat to the already weak economy, given that consumer spending accounts for two-thirds of total economic activity.”

A piece in the Financial Times quotes a US analyst who recognizes that the third and fourth quarter are unlikely to yield the “modest recovery” the Fed predicted at the beginning of the year :

“’Coming at a time when the cash flow from the rebates has dried up and the growth in labour income is slowing to a crawl, the restriction in lending to households underscores the challenges facing the consumer in the second half of the year,’ said Michael Feroli, a US economist at JPMorgan.”

Associated Press : Federal Reserve finds deepening credit crisis

Financial Times : Tighter rules dash hopes of end to squeeze

It’s hard to believe that anyone sees the US dollar as a “safe haven” anymore, but that is what has been happening as commodities continue to fall and the markets remain inscrutably volatile. Add soft data from America’s main trading partners, and it looks like a short-term dollar rally. The Associated Press is reporting Fears of global slowdown buck up the dollar :

“The dollar climbed to eight-week highs against the euro and seven-month highs against the yen as fears of a global slowdown helped the dollar continue its rally.”

Ironically, the exportation of financial turmoil tends to strengthen the US currency :

“The dollar gained as gloomy economic signs came in from abroad.

The Japanese government said a monthly index of business conditions was worsening, setting off the yen decline, said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon Corp.

Meanwhile, the German government said industrial orders dropped unexpectedly in June, with orders from elsewhere in Europe leading a decline that underlined pessimism about the outlook for the continent’s biggest economy. Orders dropped 2.9 percent in June, following a 1.4 percent drop in May, the Economy Ministry said.”

In covering the same topic– the dollar’s apparent strength– the Wall Street Journal was able to locate a dissenting view :

“The dollar was surging even before oil prices began to go lower Wednesday, following the release of German economic data. Manufacturing orders in Germany fell for the seventh consecutive month, leading analysts to predict a dire future for that country’s economy.

‘The dollar is gaining by default,’ said Michael Klawitter, currency analyst at Dresdner Kleinwort in Frankfurt. ‘What is happening is not really dollar strength, but rather other currencies are weakening significantly.’”

Associated Press : Fears of global slowdown buck up the dollar

Wall Street Journal : Dollar Rallies on Oil, European Data

High gas prices have begun to force American consumers to make lifestyle changes that many of them don’t realize are permanent. There are a lot of cheerful feature stories about stylish scooters and colorful smart cars in glossy magazines, but these visions of the future have an air of desperation about them. A more realistic glimpse is offered by this article from the Associated Press, that documents Americans unwittingly demanding adequate public transportation systems :

“Once considered the travel choice of last resort, some say the confluence of rising gas prices, airline headaches and the rise of discount carriers is creating a kind of renaissance in the bus industry.


Joseph P. Schwieterman, a professor of public service management at DePaul University, said growth in the bus industry has accelerated recently — reversing steady declines since 1960 — as low-cost carriers such as Coach USA’s Megabus and Greyhound’s Boltbus take aim at the lucrative curbside business of so-called Chinatown operators.

Chinatown buses, which run from one city’s Chinatown to another, offer an extremely popular curbside service, especially among 20-somethings looking for an inexpensive way to get wherever they are going. They also operate outside of terminals, saving companies millions in building and labor costs.”

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It was apparent months ago that the demand for municipal mass transportation had skyrocketed, highlighting a glaring shortcoming in US infrastructure development. The New York Times reported in May :

“Mass transit systems around the country are seeing standing-room-only crowds on bus lines where seats were once easy to come by. Parking lots at many bus and light rail stations are suddenly overflowing, with commuters in some towns risking a ticket or tow by parking on nearby grassy areas and in vacant lots.

‘In almost every transit system I talk to, we’re seeing very high rates of growth the last few months,’ said William W. Millar, president of the American Public Transportation Association.

‘It’s very clear that a significant portion of the increase in transit use is directly caused by people who are looking for alternatives to paying $3.50 a gallon for gas.’

Some cities with long-established public transit systems, like New York and Boston, have seen increases in ridership of 5 percent or more so far this year. But the biggest surges — of 10 to 15 percent or more over last year — are occurring in many metropolitan areas in the South and West where the driving culture is strongest and bus and rail lines are more limited.”

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The Federal Reserve has announced an array of additional emergency actions to address concerns about widespread insolvency in large US financial firms. The extraordinary nature of the Fed’s intervention indicates the gravity of the situation, even as the stock market rallies and some traders profit from the extreme volatility of the fianancials. The Times reports this morning :

“The US Federal Reserve unveiled a barrage of measures yesterday to lend stressed financial institutions more funds, and for longer periods, as it stepped up its drive to limit the fallout from America’s housing slump and the global credit crunch.

In a signal of concern over the still-fragile state of world financial markets, highlighted only two days ago by the IMF, the Fed expanded its emergency lending scheme for Wall Street investment banks for the fourth time in five months.”

The Fed will also work with the European Central Bank, in an attempt to alleviate pressures that the US economic collapse is putting on EU nations :

“With revived market strains also evident in Europe, the European Central Bank (ECB) and the Swiss National Bank announced joint action with the Fed. They are to auction dollar loans to European institutions for 84-day terms, in addition to 28-day loans already available. To facilitate that, the Fed said it would extend a dollar swap line with the ECB and the Swiss bank.”

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The Financial Times considers the larger implications of yesterday’s announcement for monetary policy, in an article headlined Big step for Fed after resisting calls for longer-term funds. The extension of the liquidity measures represents something of an about-face for Fed chairman Ben Bernanke :

“Yesterday’s further barrage of liquidity support measures from the Federal Reserve broadens its tools to include options on liquidity and extends the maximum term of its regular operations from one month to three.

This is a significant step for the US central bank, which had resisted calls to provide longer-term funds.

But in recent weeks there has been growing evidence that money market strains were increasing at longer durations. Officials may have seen benefit in providing additional reassurance on access to longer-term funds at a time of extraordinary volatility in bank stocks.”

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